The Great Corporate Welfare Con-Versation

It’s a worry that we’re having pretty much the same economic debates in the 21st century as Adam Smith was in the 18th century.

After all, the intervening centuries of experimentation have surely demonstrated one principle beyond doubt: do not give welfare to private corporations.

Corporate welfare is economically ineffective, politically corrupting, and morally dubious.

It lowers our living standards, entrenches privileged corporate interests, and enriches some at the expense of all.

And yet here we are. The Abbott government has spent the last few months debating whether it should stump up cash for Qantas, SPC Ardmona, Toyota, Cadbury, and now the entire farm sector.

Qantas is likely to get a government debt guarantee. SPC Ardmona’s request for money was declined by the Commonwealth, and accepted by the Victorian government. Toyota left before the Abbott government could formally decline further subsidies. Cadbury got a dozen or so million as part of an election promise. Australian farmers are about to get a big wad of cash packaged up as drought relief.

All in all, that’s not a bad success rate for the rent-seekers. If you were a struggling business, why wouldn’t you chance your arm? Why not ask for a bailout?

Firms fail all the time. It’s hard to measure, but we could guess from page 40 of this paperthat, say, one in 20 businesses fail every year.

The unknown question is how the political system will respond. If the dollar or interest rates are unpredictable, then the Australian parliament is doubly so.

It is tempting to use taxpayers’ money to “save” jobs. The benefits of doing so are highly visible, and the costs are diffused across the population. There’s always a clamour to intervene. Many people view government as a deus ex machina – an opaque and limitlessly powerful entity that can fix problems with the strong of a pen … if only it had the “will” to do so.

So the fact these claims on the taxpayers’ dollar seem to have all come at once has made an interesting test of the Abbott government. Especially after its shaky first few months.

But governments are temporary things. More important is the longer-term dynamic: That of the parliament unsure how to relate to the private sector in an era when their biggest interventionist tools have been decommissioned.

For most of the 20th century, Australian industry was protected by large and complex tariffs. The theory was that protecting manufacturers against cheap imports would grow the economy and encourage exports. Exports being better than imports. Building cars better than riding the sheep’s back.

(Tariffs and subsidies are two sides of the same coin. Tariffs transfer wealth from consumers to producers. Subsidies transfer wealth from taxpayers to producers. The Productivity Commission collapses both into the phrase “effective assistance”. The PC is too … PC … to call it all “corporate welfare”.)

Old-school protectionism has no serious supporters today. For all the hand-wringing about neoliberalism, the intellectual case for protectionism fell when the tariffs did.

Yet the political calculus that supported Australia’s corporatist industry policy remains.

Voters liked protectionism because the gains (keeping out foreign competition) were obvious, and the costs (lower standards of living, more expensive consumer goods, a slower economy) were harder to see.

Furthermore, corporatism was a vehicle through which politicians could share their vision of the future. Our political class has always declared it wants to shift the economy from primary industry to manufacturing. Both Kevin Rudd and Tony Abbott said they want Australia to “make things”.

In other words, they’re in denial of the fact that a government overseeing an open economy is not able to decide what that economy looks like.

And that denial leads to haphazard, confused and unpredictable policy.

Take the distinctions the Abbott government is trying to draw between the corporate welfare it is willing to pay and that which it is not. It insists that Cadbury (welfare application successful) is different from SPC (welfare application denied).

In an important way, Tony Abbott is right. Cadbury is different from SPC. Cadbury is being paid to build “tourism infrastructure”. Tourism is a bottomless pit of government spending: A unique policy area where no spending can be too much and where no evidence needs to be produced that the spending is effective.

In this way Australian governments have camouflaged traditional industry assistance to fit the economic philosophy of the times.

After all, it wasn’t an accident Kevin Rudd recast car subsidies as “green” car subsidies. He wanted to pretend Labor’s customary support of automotive unions was instead part of its climate change plan.

Likewise, the government’s drought assistance package is old industry policy in a new guise. 20th century Australian governments aggressively regulated and protected the agricultural sector. They controlled production volumes, stabilised prices, and imposed marketing boards.

Most of those direct interventions have been eliminated. Now agricultural subsidies come at arms-length, disguised in the form of periodic drought packages, and wrapped in rhetoric about national disasters.

Yes, we have learned a lot since Adam Smith’s day. But economic knowledge and political incentives are very different. The government simply cannot resist the political demand for corporate welfare.